Individual Retirement Account (IRA) Basics
You’ve probably heard a lot about IRAs, and how they’re an investment option for retirement. But what exactly is an IRA—and is it the right choice for you?
What's an IRA?
An Individual Retirement Account (IRA) is a type of investment account that helps you save for retirement. It’s similar to a 401(k).
However, unlike a 401(k), it’s not tied to your employer. An IRA belongs to you individually, which means you get more control and flexibility.
There are two types of IRAs:
You deduct your IRA contributions from your taxes in the year you made the contributions, which lowers your taxable income for that year. You then pay taxes on the money when you withdraw it in retirement (based on your income at the time of withdrawal).
You contribute using after-tax money (taxed based on your income at the time of contribution), without deducting those IRA contributions from your taxes. You then withdraw your money tax free.1 You can withdraw your contributions (but not earnings) at any time—not just in retirement.
You can set up an IRA in one of two ways:
- A rollover IRA. Transfer over existing retirement savings (like a 401(k) account from a past job) to fund your IRA.
- A start-up IRA. Make an initial, lump-sum deposit to fund your IRA.
Why choose an IRA for your retirement savings?
An IRA is all about you. It offers:
- Convenience. Your IRA belongs to you. It’s not tied to a company you work for, and it sticks with you through retirement, so you have more flexibility with when and how you contribute to it.
- Control. You’ll have access to a broad range of investment options, not just what’s offered in an employer retirement plan. (Options can include mutual funds, stocks, bonds, and more—and we can help you with investment choices if you want.)
- Consolidation. You can transfer other retirement accounts into your IRA—consolidating your savings in one spot.
Why choose Principal for your IRA?
You've seen why an IRA can be a great option for saving for retirement. Learn more about our IRA options.
Or, open your IRA with Principal today:
We offer options specific to your investing style.
- A Principal IRA keeps you in the driver’s seat. It gives you the control—with as much or as little assistance as you want to help you make informed investment decisions.
- A Principal® SimpleInvest IRA uses technology to create an investment mix personalized to you, that’s monitored and rebalanced on an ongoing basis.
- Let us connect you with an advisor in your area to discuss a rollover IRA.
Want more info first? Check out our article on things to think about when opening an IRA.
Help to reach your retirement goals
Investing too conservatively when you’re young may leave you financially vulnerable in the future. Check out our 3 reasons for investing aggressively when you’re just starting out.
1 Your account must be open for 5 years and you must be over age 59 ½ to be eligible for qualified tax-free withdrawals.
This document is intended to be educational in nature and is not intended to be taken as a recommendation.
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